Dollar Keeps Whipping Stocks & Bonds As Hedgies Turn Bullish

By Murray Coleman

The U.S. dollar continued to build momentum Monday, climbing to finish near the day’s highs.

The PowerShares U.S. Dollar Index (UUP) closed up today by 0.9% and has now seen its shares rise more than 7% since late August.

Monday’s volume was more than double its long-term daily average.

Meanwhile, the CurrencyShares Euro (FXE) closed down 1.4% on heavy volume and the CurrencyShares Japanese Yen (FXY) finished ahead by 0.7% on 1.5 times its regular daily turnover.

Heightened concern over Greece’s ability to trim its debt clouded better-than-expected U.S. manufacturing data and sent investors searching for safer havens. UUP dropped briefly after release of the report by the Institute for Supply Management. But traders soon returned as more doubts were raised as European leaders debated when the next scheduled bailout amount will be released for Greece.

Analysts believe that euro zone governments will ultimately come to the country’s rescue and expect to hear more word in coming days.

Still ahead is the European Central Bank’s policy announcement on Thursday. Currency traders are reportedly raising bets in some arenas that central bankers will cut rates.

The greenback as measured by an index of major global currencies slipped Monday against the yen after the Bank of Japan’s tankan survey indicated that business sentiment turned positive in the past few months.

Interestingly, the U.S. dollar beat stocks, bonds and commodities in September. According to a report analyzing returns for the month:

The U.S. currency rose 6% in September, according to a leading benchmark’s returns.

The Merrill Lynch U.S. Treasury Master Index rose 1.6% in the month.

The MSCI All-Country World Index of stocks in 45 countries lost 8.9%, the largest monthly drop since May 2010.

“In a time of crisis you want to be holding the most liquid currency out there,” a currency strategist at Barclays Capital said in the report.

He added: “It waters down the argument for the end of the dollar as a reserve currency.”

Analysts reduced forecasts for the euro against the dollar and sterling by the most since June 2010 last month.

Also, hedge funds and other large speculators who had held an aggregate bet the dollar would weaken for 14 months capitulated, the piece notes, with more wagers on gains than losses for the first time since July 2010.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.